Chapter 9

Metasteel Limited Co. has a stable sales track record, but does not expect to grow in the next several years. Its last annual dividend was $5.75. If the required rate of return on similar investments is 18 percent, what is the current stock price? (Round the answer to two decimal places.) A. $31.94 B. $103.50 C. $39.30 D. $13.50

A. $31.94

BioSci, Inc., a biotech firm has forecast the following growth rates for the next three years: 30 percent, 25 percent, and 20 percent. The company then expects to grow at a constant rate of 7 percent for the next several years. The company paid a dividend of $2.00 last week. If the required rate of return is 16 percent, what is the market value of this stock?(Do not round intermediate calculations. Round final answer to two decimal places.) A. $36.86 B. $56.12 C. $51.03 D. $46.37

A. $36.86

A company is growing at a constant rate of 8 percent. Last week it paid a dividend of $3.00. If the required rate of return is 15 percent, what is the price of the stock three years from now? (Do not round intermediate calculations.Round final answer to two decimal places.) A. $58.31 B. $42.83 C. $46.29 D. $51.02

A. $58.31

A share of common stock just paid a dividend of $3.25. It is expected that the stock will grow at a rate of 18 percent. If investors require a rate of return of 24 percent, what should be the price of the stock? (Do not round intermediate calculations. Round final answer to two decimal places.) A. $63.92 B. $54.17 C. $13.54 D. $15.98

A. $63.92

Stag Corp. will pay dividends of $4.75, $5.25, $5.75, and $7 for the next four years. Thereafter, the company expects its growth rate to be at a constant rate of 7 percent. If the required rate of return is 15 percent, what is the current market price of the stock?(Do not round intermediate calculations. Round final answer to two decimal places.) A. $69.41 B. $57.54 C. $93.63 D. $80.29

A. $69.41

Which of the following statements is true about secondary markets? A. In secondary markets, outstanding shares of stock are bought and sold among investors. B. Most secondary market transactions directly affect the capital of the firm that issues the securities. C. An active secondary market causes firms to sell their new debt or equity issues at a higher transaction cost of funds. D. All of the above statements are true.

A. In secondary markets, outstanding shares of stock are bought and sold among investors.

Which of the following is a characteristic of common stock? A. Limited liability for owners B. Fixed dividends C. Fixed interest D. Credit ratings

A. Limited liability for owners

For the constant growth rate dividend model to work, which of the following assumptions must hold? A. The growth rate must be less than the required rate of return. B. The growth rate should always be equal to zero. C. The growth rate must be equal to the required rate of return. D. The growth rate must be greater than the required rate of return.

A. The growth rate must be less than the required rate of return.

Xinhua Manufacturing Company has been generating stable revenues but sees no growth in it for the foreseeable future. The company's last dividend was $3.25, and it is unlikely to change the amount paid out. If the required rate of return is 12 percent, what is the stock worth today? (Round the final answer to two decimal places.) A. $21.23 B. $27.08 C. $3.69 D. $39.00

B. $27.08

The XYZ Corporation is expected to grow at a rate of 30% for the next two years and then settle at the industry median constant growth rate of 10%. If the company's last paid dividend was $1.50 per share, and the required rate of return is 15%, how much is the stock worth today? (Round your intermediate calculations and final answer to two decimal places) A. $13.00 B. $44.01 C. $65.91 D. $55.77

B. $44.01

Grant, Inc., is a fast growth stock and expects to grow at a rate of 25 percent for the next four years. It will then settle to a constant-growth rate of 10 percent. The first dividend will be paid out in year 3 and will be equal to $5.00. If the required rate of return is 18 percent, what is the current price of the stock? (Do not round intermediate calculations. Round final answer to two decimal places.) A. $65.68 B. $50.59 C. $85.94 D. $97.19

B. $50.59

Kleine Toymakers is introducing a new line of robotic toys, which itexpects to grow their earnings at a much faster rate than normal over the next three years. After paying a dividend of $2.00 last year, it does not expect to pay a dividend for the next three years. After that Kleine plans to pay a dividend of $4.00 in year 4 and then increase the dividend at a rate of 10 percent in years 5 and 6. What is the present value of the dividends to be paid out over the next six years if the required rate of return is 15 percent? (Do not round intermediate calculations. Round final answer to two decimal places.) A. $13.24 B. $6.57 C. $12.00 D. $10.24

B. $6.57

You are interested in investing in a company that expects to grow steadily at an annual rate of 6 percent for the foreseeable future. The firm paid a dividend of $2.30 last year. If your required rate of return is 10 percent, what is the most you would be willing to pay for this stock? (Round to the nearest dollar.) A. $58 B. $61 C. $23 D. $24

B. $61

Ajax Company has issued perpetual preferred stock with a par of $100 and a dividend of 5.5 percent. If the required rate of return is 7.75 percent, what is the stock's current market price?(Round off to the two decimal places.) A. $62.14 B. $70.97 C. $12.90 D. $53.27

B. $70.97

Which of the following statements is true? A. In order for the constant growth dividend model to properly value a firm's common stock, g must be greater than R. B. In order for the constant growth dividend model to properly value a firm's common stock, R must be greater than g. C. From a practical perspective, the growth rate in the constant growth dividend model must be greater than the sum of the long-term rate of inflation and the long-term real growth rate of the economy. D. The constant growth dividend model can be used effectively to value the common shares of a mixed growth stock

B. In order for the constant growth dividend model to properly value a firm's common stock, R must be greater than g.

Which of the following statements is NOT true about common stock? A. Common-stock holders have the right to vote on the election of the board of directors of their company. B. Owners of common stock are guaranteed dividend payments by the firm. C. Common stock is considered to have no fixed maturity. D. Common-stock holders have limited liability toward the obligations of the corporation.

B. Owners of common stock are guaranteed dividend payments by the firm.

Which of the following statements is true about common stock? A. Owners of common stock are guaranteed dividend payment by the firm. B. Owners of common stock have the lowest-priority claim on the firm's assets in the event of bankruptcy. C. Common-stock holders have unlimited liability toward the obligations of the corporation. D. Common stock is considered to have a fixed maturity.

B. Owners of common stock have the lowest-priority claim on the firm's assets in the event of bankruptcy.

Fifth Second Banc Corp. has issued preferred stock with no maturity date. It has a par value of $100 and pays a quarterly dividend of $3 per share. If the required rate of return is 10%, this stock is currently worth: A. $30. B. $300. C. $120. D. $100.

C. $120.

Starskeep, Inc., is a fast growing technology company. The firm projects a rapid growth of 40 percent for the next two years and then a growth rate of 20 percent for the following two years. After that, the firm expects a constant-growth rate of 8 percent. The firm expects to pay its first dividend of $1.25 a year from now. If your required rate of return on such stocks is 20 percent, what is the current price of the stock? (Do not round intermediate calculations. Round final answer to two decimal places.) A. $22.68 B. $4.70 C. $15.63 D. $30.30

C. $15.63

The Buckeye Corporation expects to pay a dividend of $3.15 per share at the end of next year. The firm expects the dividend to continue growing at the rate of 8% per year for the foreseeable future. If you require a return of 13% per year, the most you should pay for this stock is ______. A. $24.23 B. $68.04 C. $63.00 D. $26.17

C. $63.00

The National Bank of Columbia has issued perpetual preferred stock with a $100 par value. The bank pays a quarterly dividend of $1.40 on this stock. What is the current price of this preferred stock given a required rate of return of 8.5 percent?(Round off to two decimal places.) A. $43.25 B. $23.06 C. $65.88 D. $37.57

C. $65.88

Which of the following statements about preferred stock is FALSE? A. Preferred stock has a higher-priority claim on the firm's assets than the common stock. B. Preferred stock typically pays a fixed dividend. C. Failure to pay dividends on preferred stocks will result in a default. D. Preferred stock has a lower-priority claim on the firm's assets than the firm's creditors in the event of default.

C. Failure to pay dividends on preferred stocks will result in a default.

Cortez, Inc., is expecting to pay out a dividend of $2.50 next year. After that it expects its dividend to grow at 7 percent for the next four years. What is the present value of dividends over the next five-year period if the required rate of return is 10 percent? (Do not round intermediate calculations. Round final answer to two decimal places.) A. $9.80 B. $11.88 C. $11.50 D. $10.76

D. $10.76

Suppose a firm's expected dividends for the next three years are as follows: D1 = $1.10, D2 = $1.20, and D3 = $1.30. After three years, the firm's dividends are expected to grow at 5.00 percent per year. What should the current price of the firm's stock (P0) be today if investors require a rate of return of 12.00 percent on the stock? (Do not round intermediate calculations. Round off final answer to the nearest $0.01) A. $24.12 B. $61.30 C. $10.10 D. $16.74

D. $16.74

Prior, Inc., is expected to grow at a constant rate of 9 percent. If the company's next dividend is $2.75 and its current price is $37.35, what is the required rate of return on this stock? (Do not round intermediate calculations. Round final answer to the nearest percent.) A. 21% B. 13% C. 20% D. 16%

D. 16%

Companies raise capital in secondary markets by issuing new securities. T/F?

False

Preferred stock is legally a form of debt of a corporation. T/F?

False

Preferred stockholders are not guaranteed any dividend payments and have the lowest-priority claim on the firm's assets in the event of bankruptcy. T/F?

False

The bond valuation model can be used to value perpetual preferred stocks. T/F?

False

The common stockholders of a company have unlimited liability. T/F?

False

A large number of investors in equities actually own through pension or retirement funds. T/F?

True

Equity securities are certificates of ownership of a corporation. T/F?

True

For a company that has no growth, dividends stay constant over time. T/F?

True

Growth stocks typically pay little or no dividends. T/F?

True

In the general dividend-valuation model, the price of a share of stock is the present value of all expected future dividends. T/F?

True

The bid price is the price that a dealer pays for a security. T/F?

True

The constant-growth stock has dividends growing at a constant rate over time. T/F?

True

The dealer's selling price of a given stock is also known as the ask price. T/F?

True

The value of a firm's equity is calculated as the sum of the present value of all expected future cash flows. T/F?

True

Whenever the constant-growth rate for dividends exceeds the required rate of return on the common stock, the constant-growth model provides invalid solutions. T/F?

True